Miner BHP Rejects Industry’s Bigger is Better Mantra

Our subscribers were the first to hear what drove the chief executive of the world’s biggest mining company, BHP Billiton, to split the firm in two. In his first interview since taking BHP’s helm, Andrew Mackenzie told London-based mining editor Andrew Peaple and mining reporter Alexis Flynn that breaking up the company was top of his to-do list when he became CEO early last year. He also definitively ruled out any big acquisitions.

The story as it appeared on Dow Jones:
Oct. 31, 2014 6:53 p.m. ET – Miner BHP Rejects Industry’s Bigger is Better Mantra

By Alexis Flynn and Andrew Peaple

LONDON– BHP Billiton PLC is the world’s largest mining company by market value with operations in 25 countries. So what’s one of the first things its chief executive advised his board when he joined: break it up.

Now, Andrew Mackenzie, a former academic and energy executive who joined the Anglo-Australian BHP in 2008, is about to get his way. The miner disclosed plans this summer to spin off unwanted assets in areas such as aluminum and manganese to shareholders. The business might be worth $18 billion as a stand-alone, say analysts.

Mr. Mackenzie said in an interview from BHP’s offices near Victoria station the spinoff, due to be completed next year, shows BHP isn’t about getting bigger and bigger. Once a company decides to focus on large assets, “there is a lot of simplification,” the 57-year-old said.

The slimmed down BHP will pursue four main areas–iron ore, oil and gas, copper and coal. It also may expand into potash, a mineral mainly used as fertilizer. Mr. Mackenzie plans to focus its future efforts on just 12 major assets around the world, down from 30 before the split.

The split is something more companies–especially in natural resources–are doing to hone their business and make earnings more predictable. Three years ago, U.S. oil major ConocoPhillips split, leaving one company focused on exploration and production, and another on refining and selling fuel products.

“Complexity is compounded when you have too many products, when you have too many things, and you have multiple cultures in your organization,” said Mr. Mackenzie. In contrast, his predecessor, Marius Kloppers, attempted two huge deals during his six-year tenure, with fellow miner Rio Tinto PLC and Canada’s Potash Corp. of Saskatchewan Inc.

A slimmer BHP isn’t universally loved. Its shares fell 4.9% in London on Aug. 19, the day the split was announced. They finished up 1% at $59.44 in New York trading Friday.

“The main beneficiary of the proposed demerger would appear to be the multitude of advisers that will no doubt require significant compensation for helping structure the deal,” said Paul Gait, a mining analyst at researcher Sanford C. Bernstein.

Mr. Mackenzie’s approach also contrasts with that of mining rival Glencore PLC, which recently approached another giant, Rio Tinto PLC, about a potential $160 billion merger. Rio rejected the approach.

For BHP, such big deals are “effectively off the agenda” Mr. Mackenzie said.

“To some extent the Glencore-Rio idea is a counterpoint to us,” Mr. Mackenzie said. “We’ll see who’s right, I guess.”

As BHP trims, it is also turning more to oil and gas. Mr. Mackenzie, a former BP executive whose doctoral thesis is still used by geologists looking for oil, said BHP has the skills to compete with top energy companies.

BHP is already one of the biggest investors in U.S. shale, operates oil rigs in the deep waters of the Gulf of Mexico and holds large exploration blocks near Trinidad and Tobago.

“In shale, in offshore oil and gas, in those areas we’re as big as a major, we’re as technically able, and in some cases better,” he said.

He said the company could use expertise gained in mining when drilling for hydrocarbons.

“There are more synergies between copper, potash, coal, iron-ore and the upstream oil and gas portfolio that we’ve chosen than there is between offshore oil and gas and refining or petrochemicals, or corner shops that sell chocolate bars with petrol,” said Mr. Mackenzie.

BHP has faced troubles with shale assets. This week, the company put acreage in the Fayetteville shale area of Arkansas on the block, two years after low natural gas prices forced it write down $2.84 billion of the nearly $5 billion price it paid Chesapeake Energy in 2011.

And Mr. Mackenzie has attracted criticism for not returning more money to investors through share buybacks. Some investors had expected the spinoff would be accompanied by a large cash return.

But he insists it must have a strong balance sheet with commodity prices so volatile.

“Only when we have excess cash do we get into the debate you’re talking about, and we should signal that more strongly,” said Mr. Mackenzie.

With mineral prices in general under pressure, BHP already cuts its capital spending by a third in its fiscal year to the end of June by a third, to just over $15 billion, a level it plans to dip under this year.

For now, BHP will focus its investment on copper, as well as oil and gas businesses. BHP still has major assets it could develop further, such as its Olympic Dam copper and uranium project in Australia or its Jansen potash project in Canada. But Mr. Mackenzie said there were unlikely to be announcements of ”mega investments” as the company would prefer to stick to small, incremental spending on projects.

Write to Alexis Flynn at alexis.flynn@wsj.com and Andrew Peaple at
andrew.peaple@wsj.com

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